I Want A Movie! Now!

Netflix and TiVo ushered in an age of couch-potato bliss. Netflix lets its customers browse through its huge movie catalog on the Web and rent DVDs through the mail without having to worry about late fees. TiVo lets people digitally record their favorite shows and zoom through the ads. But now couch potatoes are perched on the cusp of true paradise. Soon they won't even have to stand up to trudge to the mailbox; fat broadband pipes will let them directly download movies over the Net to their television.

Netflix and TiVo want this digital nirvana to arrive as soon as possible, and they are about to join forces to make it happen. Later this month, NEWSWEEK has learned, the companies plan to unveil a simple but significant partnership that could shake up the media world. Subscribers who belong to both services will be able to download their Netflix DVDs over the Internet directly into the TiVo boxes in their homes, instead of receiving them in the mail. Spokespeople at the companies refused to comment on what they called rumor. But an insider who was close to the negotiations says the straightforward partnership is all but a done deal, pending only the approval of the TiVo board this week: "You don't need a lot of creativity to figure out the details," the insider said.

TiVo in particular has been preparing for such a move since at least January, when it snapped up a small Palo Alto, Calif.-based start-up called Strangeberry. TiVo currently faces steep competition from big media companies like Comcast and EchoStar, which are putting nearly identical software in their cable and satellite set-top boxes and giving it to customers for free. TiVo and its rivals currently only draw programming from traditional television broadcasts. But Strangeberry software, codeveloped by one of the writers of Sun's Java programming language, allows users to plug a DSL or cable modem into the back of the TiVo device and draw digital content like music and movies off the Internet.

Netflix, too, has long set its sights on using the Internet to deliver films. In an interview with NEWSWEEK last year, CEO Reed Hastings predicted that by the end of the decade, Netflix will deliver most of its rentals over the Net, supplanting its distribution centers and trademark red envelopes. "We named the company Netflix, we didn't name it DVD by Mail," he said. Partnering with TiVo (TiVo's CEO, Mike Ramsay, sits on the Netflix board) would be a first step toward that goal and give the firm an advantage over new copycat services by Wal-Mart and Blockbuster.

The TiVo-Netflix pairing will create the biggest headaches for established media giants. Hollywood will be watching closely to make sure copyright protections aren't hacked, which could lead to its biggest nightmare: high-quality versions of its movies released freely onto the Internet. But it is the cable guys, with their own budding video-on-demand offerings, who will be in the hottest seat. Cable customers could prefer the larger Netflix selection and download movies to their TiVo boxes using cable's own pipes. (The downloads will likely take several hours.) Unlike the phone companies, which are regulated as "common carriers" and forbidden from discriminating against customers or content, cable firms don't have to accommodate their rivals' traffic on their networks. But if cable closes the door to the Netflix downloads, customers could migrate to the phone industry's broadband offering, DSL.

In a fast-moving industry, look for the cable companies and Netflix rivals like Blockbuster to quickly strike their own deals and copy the service. It's proof that TiVo and Netflix are getting back to what they do best: staying one step ahead of the big guys and keeping the world safe for couch potatoes.